Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Marshaling All Your Resources for Retirement

And what Larry Swedroe has to say about it.

In this episode of the Motley Fool Answers podcast, host Robert Brokamp interviews Larry Swedroe, co-author of "Your Complete Guide to a Successful & Secure Retirement." And Alison challenges Bro and Rick to guess the prices of the weirdest products at this year's Consumer Electronics Show.

Southwick: In this week's episode, Bro is going to interview Larry Swedroe, the author of Your Complete Guide to a Successful and Secure Retirement, and I'm going to take us shopping at CES.

Brokamp: Ooh, exciting!

Southwick: All that and more on this week's episode of Motley Fool Answers.

--

Southwick: So, Bro, what's up?

Brokamp: Well, I've got three things for you, Alison. No. 1, the returns over the past 20 years. Now most of us have heard, especially if you listen to this show, that over the long term, U.S. large-cap stocks have returned 10% a year. That number usually comes from Ibbotson Associates. [They began publishing it in 1926]. However, a recent Barron's article looked at the returns over the past 20 years. Do you want to take a guess at the S&P 500's returns over the past 20 years?

Southwick: No, I hate guessing at things like this because I look like a big old idiot.

Brokamp: Well, I'll tell you -- 5.5%.

Southwick: Oh, that's disappointing.

Brokamp: It is disappointing. Obviously, [we had two bear markets: .com and the Great Recession]. It really is half of the historical average because if you look at what the stock market returned [in] 1999 [I remember this because that's when I started writing for The Motley Fool], at that point U.S. large caps returned 11% a year, so if you were doing your retirement plan, you're like, "Oh, wow! Stocks returned 11% a year." Throw all the numbers in there. Calculate it. "Oh, I only need to save this much." If you didn't alter that since then, 20 years later you're coming up short, because your portfolio didn't return what you hoped it would.

The main lesson is there's the historical returns, and there's what you're going to actually see. We don't know what the future will look like. Actually there's a silver lining to this and then a not-so silver lining. The silver lining is historically when you've had a 20-year period with significantly below-average returns, it's been followed by a 20-year period with very good returns.

However, as we'll talk later on this show in my interview with Larry Swedroe, unfortunately stocks are still highly valued, so today retirement plans should not assume that they're going to get that historical 10%.

Southwick: I know. You keep saying that.

Brokamp: I know, I know. So that's No. 1. No. 2 -- living dangerously in America. So as of this taping, the partial government shutdown is still in effect, which means hundreds of thousands of federal employees either are not working and not getting paid or are working and getting paid. Then there's the estimated four million government contractors who are not getting paid. And then there are all the people who have businesses related to the government, for example, the businesses around national parks. Those folks are suffering.

Some recent stats from an article from CNBC highlighted that it's not just government workers. One of the stats is in a headline [by Emmie Martin] and the headline is, "The government shutdown spotlights a bigger issue: 78% of U.S. workers live paycheck to paycheck." These are stats from a study from CareerBuilder. It's worse for women. 81% live paycheck to paycheck vs. 75% men. More than 50% of the respondents save less than $100 a month.

And then Martin's article also cited a GoBankRates survey which found that 61% of people don't have an emergency fund, and then there's that oft-cited Federal Reserve study that found that 40% of Americans couldn't cover a $400 emergency. And the lesson, here, is that just has to change, because you just don't know when a period is going to happen when either you're going to have a big-ticket expense, or something is going to happen to your income that is completely out of your control.

So, if you don't have that, what happens? Well, I'm sure you've read these stories of people now trying to negotiate with their mortgage companies or their landlords or their kids' colleges for a way to delay payment, and that's not a position you want to be in. So if you are someone who does not have an emergency fund, that's got to be your No. 1 priority.

Southwick: And remind everyone what an emergency fund should be.

Brokamp: Three to six months of must-pay expenses. The more you have must-pay expenses like a mortgage, or the more you have people who are relying on your income and your financial stability, the more money you should have set aside in something nice and safe -- plain, old cash.

And then No. 3 is having the money talk. This article is from November, but I didn't read it until recently. It's in The New York Times by Maria Teresa Hart called, Navigating the Financial Side of a Relationship. She started off with the stats we've always heard: that money problems often are a big problem in marriages. People often fight about money. Fights about money are often more toxic and more long-lasting.

She talked about how she has a regular talk with her husband every month. She gets the reminder that pops up on her calendar and it reads [and this is all caps], "HOT TALK DOLLAR DOLLAR BILLS Y'ALL."

The whole article is pretty good because you've got to have the money talk, it has to happen on a regular basis, and she has some good guidelines for what to talk about. Some of it is stuff that you would talk about in the beginning of a relationship, but then some are good ground rules. For example, talk about your money past. Whenever you start dating someone, you're always talking about your relationships past.

Southwick: What?

Brokamp: You should also talk about your money past. You don't you talk about your relationship past?

Southwick: No!

Brokamp: You don't?

Southwick: No!

Brokamp: You don't talk about the people you dated?

Southwick: Rick, do you do that?

Rick Engdahl: I don't have a relationship past. Only the present.

Southwick: No! No!

Brokamp: Ron doesn't know about your ex-boyfriends?

Southwick: I'm sure he knows that they exist and that they were a thing in my life, but we don't sit around and ruminate on, "Oh, this person..." One time he was doing evasive maneuvers at a Trader Joe's, and I didn't know why. I said, "What are you doing?" He was zigging and zagging and hiding around things. He was like, "Oh, I just saw an ex-girlfriend." That's one of the few conversations we had, and that was it. That was the end of conversations.

Brokamp: So, you don't have to have that conversation, clearly, because you're happily married; regardless, everyone should have a conversation about their money history.

Southwick: Oh, we talk about our money way more than we do about our old relationships.

Brokamp: So, that's something that you do in the beginning. Obviously you don't need to do that every month. A few other good ground rules. First of all, don't withhold information. An example she uses is a closet full of Amazon purchases or an online gambling habit. You just have to be forthright about all that stuff. The other ground rule is you have to be comfortable saying that. Nobody is perfect about money. Everyone's going to make mistakes. During this talk, you have to feel you can own up to this, and it's not going to be a horrible thing.

She also talks about remembering that all solutions aren't universal. Different people have different approaches to money. Some people will need to budget, and some people won't, and she put it in the context of Gretchen Rubin's Four Tendencies. You interviewed Gretchen Rubin back in November of 2017.

Southwick: Didn't we air that interview on the show?

Brokamp: We did. The "Four Tendencies" are basically personality types: the way you meet your inner expectations and your outer expectations. You're an obliger, a questioner, the rebel, and the upholder. If you have two people who are rebels, are married, and trying to handle your finances, good luck with that one. That'd be very tough. Just understanding that what works for you may not work for your spouse. The bottom line is, I thought it was a great idea to have that monthly money talk regardless of how you do it.

Southwick: But what do you talk about? Here's what I bought?

Brokamp: Sort of. My wife and I used to do something called the Sunday Summit, which wasn't just about money. It was about the week ahead. Then we transitioned to just doing it over email. Every Monday morning she sends me an email of what's coming up in the week ahead and then I reply, "It's OK. I can do this. You do that."

The practical thing would be a financial update. Where are we? Where are our accounts? For people like me who like to use calculators, I would say at least every year, you do an update. Are we on goal to meet retirement? To meet college? As people know I have three kids now on the verge of college, so that's a big thing that comes up.

I also like the idea of anticipating future expenses. If you know where you're going on vacation in the summer, are you on track to be able to pay for that? And chances are some sort of big expenses come up, anyhow, and do you have a plan for paying for that? I think those types of things are the most important.

This time of year is the time to talk about taxes. You're going to be receiving documents either emailed to you or mailed to you. It's a great time to create an envelope. You agree on where you're going to put the tax information, so when the time comes to do the taxes, you know where to find it. So, those types of things.

[...]

Brokamp: The No. 1 goal for most investors is retirement; yet, a successful retirement isn't just about growing your portfolio. There are many other decisions you have to make related to your benefits. Your Social Security. Medicare. Your longevity. Your family. Your health. Even your happiness.

Fortunately, we have just the right person to help us with these decisions. On the phone is Larry Swedroe, the director of research for Buckingham Strategic Wealth and author or co-author of 15 books, including the recently published, Your Complete Guide to a Successful and Secure Retirement co-written with Kevin Grogan. Larry, welcome to Motley Fool Answers!

Larry Swedroe: Glad to be with you, Bob!

Brokamp: I'm a big fan of your books, as you know. I would count you among my favorite authors. You write mostly about investing, but with this book I found it interesting that your first chapter isn't about investing. It's about retirement planning beyond the financials -- which is really about the emotional side of retirement. I was curious how you came to that decision. I was wondering if over your decades of being in the business, you found that a lot of people are not psychologically prepared for retirement.

Swedroe: Yes, it's a great question. I set out to write a book that would meet the title Your Complete Guide, and so you not only have to plan for your financial retirement and make sure you have sufficient assets to accomplish your financial goals, but you also need to plan for a successful life in retirement.

What the research on the subject of retirement living has shown is that many people find the great satisfaction in their lives really from their work, and that comes in two forms: one, that their social connections are tied to their connections at work, and secondarily, they get their intellectual stimulation from the job, so when they retire, they lose those two very important things.

What we find is that depression becomes a very common problem. Divorces -- what are called "silver" divorces now -- is the fastest-growing part of the population, with many wives or spouses saying, "I married you for better or worse, but not for lunch." You have to have reasons to get out of the house. And lastly, what's maybe the worst of all is the fastest-growing suicide rate -- this would probably shock people -- is among retirees.

I became a friend of Alan Spector, who wrote a wonderful book, Your Retirement Quest, and talked about the need for planning a successful life and a meaningful one in retirement. Envisioning what that perfect day would look like, and planning it. Maybe even practicing it ahead of time. So, I recruited Alan to help me write that first chapter, and we made it the first chapter because it doesn't matter if you're successful with your finances. If you don't get that part right, the rest almost becomes irrelevant.

Brokamp: Right. I often say that retirement isn't just about spending your money. It's about how you're going to spend your time, and many people I have found enjoy maybe the first three to six months of retirement, and then question why they retired to begin with.

Swedroe: Exactly, so it's about finding a purpose. I work with lots of people. Some of them go on to became candy-stripers at a hospital. That accomplishes two goals for them: one, it gets them out of the house and keeps them connected socially, interacting with people, and [two], it fills an emotional need for them to feel like they're giving something back. Others attend college classes. I had two uncles who decided to prepare taxes for the elderly and the poor and do it as [a way to give] back to the community.

So, it doesn't matter, exactly, what it is. It could be playing bridge or learning a new language. Whatever it is, it's something that you will find pleasure, enjoyment, psychological and intellectual fulfillment from.

Brokamp: That's how you kick off the book, and then you do move into your bread-and-butter asset allocation. Obviously the first decision that any investor has to make is how much to put in the stock market and how much to keep out. How do you recommend that people make that decision? I know that's a big question.

Swedroe: We'll start with three key questions or issues. I identify one as how much ability you have to take risk. While many people think of investment horizon as one factor, you also have to consider your labor capital, or human capital, and how it correlates to the risk of stocks.

For example, I ask people to think of their labor capital in this way. "Are you a stock or a bond?" By that I mean, if you're a tenured professor at Washington University, your income is highly stable. You're not likely to get laid off in 2008, so your labor capital is very bondlike. That means you can hold more equity risk. On the other hand, if you're a computer salesman, a car salesman, or a construction worker [someone whose income is more tied to the economic cycle and the stock market]; well, you're a stock, and therefore you need to hold more bonds in your portfolio, all else equal.

I want to touch on one other key thing about this ability to take risk. People have to remember that the average 65-year-old couple still has a second-to-die life expectancy of about 25 years. And that means half the time, one of the two of you will live longer, so you really need and should be planning for 30 years. While your horizon certainly is getting shorter as you age, even 65-year-olds have pretty long horizons, and you don't want to get too conservative. That's the first issue you need to address.

The second is the willingness to take risks. How much stomach acid you can absorb without hitting the panic-sell button. I tell people you shouldn't even take that much risk because life's too short not to enjoy it. If you want to take what I call the "sleep well test," what dollar amount of your portfolio would you be willing to lose and still say you're not going to worry. You'll enjoy your life, convert that into a percentage, and then that can help tell you how much equity risk you can be taking as a maximum. We give a table in the book to help.

And lastly, the question is "need to take risk." Someone who has $10 million and spends $200,000 a year; that's a 2% withdrawal rate. They have no need to take risk, and all else equal, probably should be sitting with a very low equity allocation.

On the other hand, if you have a high spending need, you may need to hold more equities; so one of the things we work closely with people on is helping them, No. 1, avoiding converting what are nice-to-haves, or desires, into needs [the more you need, the more equity risk you are going to have to take] and the more risk your portfolio will blow up in a bear market and cause you, maybe, to panic and sell.

And the other is to recognize at what point you have enough, because once you have enough, the good things in life are either free or cheap. I can't think of anything that I find more joy with than going out and hitting a tennis ball with my grandson or reading books to my other grandkids. Taking a nice walk in the park with my wife. The average American is no happier with $75,000 a year of income than someone who has two, three, or four times that amount.

You really want to make sure you're not converting desires into needs. And a good rule of thumb, today, is if you have 30 times or so the amount of spending requirement, you can get by with a very low equity allocation and have almost no risk of running out of money.

Brokamp: There are a couple of other ways that people often think about factoring other things into their asset allocation. You mentioned human capital. Some people, including Vanguard founder John Bogle, suggest that you should consider Social Security as a big, fat holding in bonds, and factor that into your asset allocation. What's your take on that?

Swedroe: He's got the right idea, but in my opinion, it's the wrong approach. It's way too complicated. That means you've got to, in effect, convert your Social Security into an annuity, and that has a present value of X, and with interest rates changing, that's always going to change.

I think there's a much simpler way. What you do is say the following: "I need $70,000 a year in spending. I'm going to get $30,000 a year in current dollars in Social Security, [so] I need $40,000." And then you build an asset allocation based on that lower number. If you have any other pensions, as well, you could take that into account. So yes, it is just like a safe bond, but the easy way to deal with it is to simply reduce your need to take risk by the amount of your Social Security.

Brokamp: Since we're on the topic of Social Security, let's talk a little bit about that, and then we'll get back to asset allocation. You devote a whole chapter to it in the book. It's a good chapter. It emphasizes again, to me, that it's really pretty complicated, especially if you are, or ever were, married.

Many years ago, the strategy was to take it as soon as you can. More and more people started saying you should delay it as much as you can. But the real answer is, it does depend on your circumstances, and you probably need some professional help to make that decision.

Swedroe: Let me say this. First, the people at Social Security are fairly knowledgeable. We have found that they generally get it right more than half the time, but not always, so professional help can be of assistance. We have experts in our firm that are experts, specifically, on Social Security, so we will sit down with our clients and walk them through.

One, you definitely do need to consider the spouse and their Social Security benefits, because you can capture spousal benefits, and that should be a consideration. But the general rule should be this: Assuming you have good health, so your average life expectancy matches the average American, then everybody who can afford to delay taking Social Security should do so with the one exception possibly being this issue of taking spousal benefits early.

The reason you want to do that is Social Security is actuarially neutral. Therefore, the longer you delay, you're actually picking up 8% more a year in Social Security benefits. So, if you move from 62 to 70, that's 64%. In effect, what you're doing is buying longevity insurance against the risk of living longer, and that's the highest risk-free rate of return you're ever going to get.

Therefore, you're generally far better off living off your taxable investments. Drawing them down. Taking minimum RMDs out of your IRA if need be, and you will find when you run what's called a Monte Carlo Simulation, the odds of running out of money are the lowest by delaying Social Security. That's how we help people figure out the answer. You can simply run a Monte Carlo analysis, and it will tell you what the right answer is.

But again, people buy longevity insurance and annuities. This is one where you don't have to pay any insurance company a premium to buy that insurance and cover their origination costs and the commissions to their salespeople, etc. You're getting that longevity insurance for free. Unless your health is not good [maybe you have cancer or a family history], I really would urge people to delay their Social Security as long as possible as a good general rule.

Brokamp: In your book, you also highlight another tool that people can consider, which is MaximizeMySocialSecurity.com, which was created by Larry Kotlikoff, an economics professor at Boston University and also a write-in candidate for president in 2016. I didn't know if you knew that or not.

Swedroe: There are some good tools available. A friend of mine, Professor Bill Reichenstein, also has a website and a tool that he keeps up to date as the rules change. There are tools available for people if you're not working with a good financial advisor who is also an expert in this area.

Brokamp: Since you brought up annuities, let's move to that topic. For many people, annuities have a bad rap, and for many good reasons in terms of their costs and the way they're often sold and not bought. But the type of annuity that you are speaking about -- and the type of annuity that I have recommended in the past [let's start with one of them] -- is the single premium income annuity. It's the plain vanilla annuity. You hand over a lump sum, and then the insurance company is going to send you a check for the rest of your life. You think that's something worth considering, correct?

Swedroe: Yes, that's the only kind of annuity you want to buy. You want to avoid all variable annuities. Those products, as you said, are meant to be sold because they generate big commissions, typically. They should be avoided. There's no reason to have investments inside annuities. You buy annuities for longevity insurance. And here's why I don't recommend buying those spheres when they're immediate annuities, or immediate payout annuities. I recommend that investors consider almost always what are called "deferred payout annuities," which are newer products.

The way to think about that, Bob, is the following. We want to buy insurance for things that we can't budget for. We do budget for an oil change, but we don't budget for getting into a big car accident. We buy auto insurance for liability protection and physical damage to the car, but we don't buy protection against that oil change. We budget for it.

What you should be doing when thinking about annuities is, you budget for the expected, and you buy insurance for the unexpected. If you're 65 years old, and you think your average expectancy is, say, 20 years, you should be budgeting to live until age 85 and building up a portfolio to allow you to do that.

You want to buy insurance against living longer than expected; therefore, you would buy an annuity that maybe would start paying out at age 85. That allows you to keep the rest of the money and invest it. You can buy an annuity with a deferment for a much smaller percentage of your portfolio than you could if you bought an immediate annuity. That's the way we think about it. It makes the most sense to me. Again, you want to buy insurance for the unexpected, not the expected.

Brokamp: Just to sum up some of the things you mentioned in the book, the age at which people should consider buying these is generally between 65 and 70, as I understand it?

Swedroe: I would say it is a higher number, and the reason is this. Insurance companies are in the business to make money. They have costs of origination as well as their cost of the expected payouts, and they want to generate a profit on top of that, which they're entitled to, so you have to overcome those costs that are built into the product.

So when you're age 35, 40, or even 50, the "mortality credits" that you get as a benefit in them from the people who die early and never collect are very small because very few of average 30-year-olds die, so there's very little in the way of mortality credits. And you can earn higher rate of returns by replicating investments; say, build a portfolio of CDs out for the next 10 years and do better because you don't have those costs. Generally, I would tell people you want to start to buy annuities in your mid-70s, but you could buy a deferred annuity at any point in time as long as you start it at a later period [maybe age 80 or 85].

Brokamp: One of the topics you did touch on in the book a few times is our mental health and our mental capacity to manage money later in life. To me, that's another benefit of these annuities in the sense that you will have the money coming in regardless, and you can't make as many mistakes as you might make if you had more liquid assets.

Swedroe: I completely agree. That is a benefit of having an annuity, but we do have a whole chapter on the issues of cognitive decline and elder abuse, and it's especially important for women, who tend to be widowed or divorced living alone, single, and they live longer than men. They are also more targeted by a crook and are subject to all kinds of financial shenanigans.

Therefore, you really need to have documents that are called durable powers of attorney for health and financial matters [not just financial, but health] and giving trusted family members the ability to take control of your finances by, for example, requiring you to go to a doctor and pass a cognitive test, because when we do get cognitive decline, many people will fight it, resist it, don't want to lose control, and fear that.

You want to make sure you're planning for that because if you live long enough -- the average person 85 or older -- probably more than half the population will experience cognitive decline. We have a whole chapter. I got help from an expert who is a nurse and an elder care attorney to help write this chapter on all the issues related to getting older.

Brokamp: Let's get back to portfolio management. You recommend a fairly diversified portfolio, and I'm going to ask you about a few asset types that have struggled over the last few years and see what you think to convince those of us who have been holding these assets to stick with them. Let's start with international stocks. I mentioned John Bogle earlier. He has often said he's not sure it's necessary. What's your take on international investing, especially now that we've gone through five to seven years of them underperforming U.S. stocks?

Swedroe: Well, my first comment is, while I have the greatest respect for John Bogle, he may be the only financial economist in the whole world who would say you shouldn't own a market-like portfolio in terms of exposure to international stocks and emerging-market stocks. I'll deal with that.

If John Bogle lived in Japan, he might have said the same thing because I think he's got a home-country bias. Look at Japanese investors who would not have invested internationally over the last 30 years. Japan's stock market today is about half the value it was in 1990. That could be the U.S. That's a risk you want to diversify, so I'll deal with that.

But to answer your question specifically, one of the biggest mistakes I have found investors make, and even highly sophisticated institutional investors, is that they fail to understand this point. Most of them think that periods of three years are long enough to judge performance, that's a long time, five years is a really long time, and 10 years is an eternity. Financial economists know that when it comes to risky assets, 10 years can be nothing more than noise, so I'll ask you this question to prove my point.

[The U.S. now has had] three periods of at least 13 years [this is getting also to John Bogle's statement] where the U.S. stock market has underperformed totally riskless Treasury bills; 1929 through 1943 [that's 15 years], 1969 through 1982 was 14 years, and more recently, 2000 to 2012 was 13 years.

I would hope that investors who lived through those periods would not have given up on the concept that stocks would outperform riskless Treasury bills. Obviously over the 90 years or so we have data, stocks have outperformed T-bills by about 7%. We go through these long periods, whether it's international stocks, emerging-market stocks, value stocks, small stocks. They all go through long periods.

Specifically on international, I'll give you one data set. From 2003 through 2007 [just before the period of the last decade], the S&P had a good run. It was up 83%, I believe. The EAFE index did roughly double that, at about 161%. What do you think emerging markets did? They were up more than about 5 times the S&P. The DFA Emerging Markets Value fund, in which I happen to invest, was up 545%.

Now, of course, investors forget that because they're subject to this recency bias. The only way you get those great returns is to be there for the long haul, and don't make this mistake of the home country bias, either. Investors all over the world believe not only that their country is safer, but it's going to provide higher returns, which of course makes no sense. If it's safer, it should provide lower expected returns, right?

Brokamp: Right. You had mentioned the EAFE. Just so people know, the EAFE is the Europe, Australia, Asia, and Far East index. It's the most commonly used non-U.S. stock index.

Swedroe: It's basically the developed markets ex-U.S.

Brokamp: Right. And ex-Canada, as well.

Swedroe: And ex-Canada.

Brokamp: Let's move on to the fixed-income side of the portfolio, an asset that does not have as long of a history, but that I think you do believe belongs in most retirees' portfolios, and that is TIPS [Treasury Inflation-Protected Securities]. Those are also an asset class that hasn't done particularly well over the last few years. What's the role of those in a portfolio, especially for someone who's going to look at them today and see that they haven't provided much return?

Swedroe: Let's think about it this way. TIPS are a vehicle that gives you insurance against unexpected inflation. The expected inflation rate is built into nominal bonds that don't provide inflation protection. Bob, when you buy life insurance and you don't die, are you unhappy that you bought the insurance and think it was a mistake?

Brokamp: No, absolutely not.

Swedroe: Of course not. You don't confuse strategy with outcome. The problem with many people when it comes to investing is they think a good outcome was based on a good strategy when it might be luck, and they think a bad outcome has to be because of a bad strategy when it just might be bad luck. You shouldn't confuse the two.

We have had a period of, obviously, well below expected inflation. I'm sure you can recall many gurus were predicting outsized inflation because of the Federal Reserve's very easy monetary policy, quantitative easing, zero interest rates, massive federal budget deficits. You had commercials recommending buying gold because inflation was going to run through the roof.

Well, we didn't get that, showing you how much forecasts are worth, which is nothing. When you didn't get the expected inflation, you bought the insurance, and you didn't collect on it; just like you shouldn't feel that you made a bad decision when you bought life insurance and you [didn't] die. You bought the protection. You got lucky and you didn't need it, and you should be thankful that that happened, because an alternate universe might have shown up.

Retirees are often the most exposed to inflation because they no longer have wages rising with inflation, and they may not have a lot of equities in the portfolio, which tend to hold up over the long term to inflation. They should probably consider TIPS more. I certainly recommend people consider TIPS for at least some portion of their portfolio and the alternative, to be compared to the returns that you can get either from municipal bonds of similar maturity or if it's in a tax-advantaged account, I would compare it to FDIC insured CDs. Then you can see the difference in returns and what's the break-even inflation rate and decide which is better.

I'll give you a simple example, and this might help people in how they think about it. If we look at the 10-year Treasury, it's yielding about 2.7%. A 10-year TIPS is yielding 0.9%, so if inflation is only 1.8%, you're better off in TIPS. I'd say that's very cheap insurance because the expected inflation rate by most economists over the longer term is in excess of 2%. That's one way for people to think about the problem. If you're not going to invest in Treasuries, you could look at what a CD rate would yield, or a municipal bond, and do the same break-even.

Brokamp: Let's move on to how investing affects retirement. When you're looking at your retirement plan, especially when you're still working, saving, and trying to figure out whether you are saving enough, one of the quandaries is, you have to have some sort of assumption about how much your portfolio is going to return. However, it's very difficult to predict the future. How do you go about that, and what are you suggesting that people should assume that they'll get from their portfolios over the next decade or two?

Swedroe: One of the worst mistakes that people make is they think of expected returns in what I would call a deterministic way. If they were to say that today most financial economists expect a return of about 7% or so for U.S. equities, maybe more like 9% for developed markets, and maybe 10%-11% for emerging because their valuations are much lower. Let's stick with the U.S. number of 7%. Then they think, "I'm going to get 7%," and worse yet they think, "I'm going to get 7% every year."

The only right way to think about that expected return is to think of it like a bell curve where the mean would be 7% and if you had thousands of alternative universes that might show up [to use a Star Trek term], half of them will have returns of more than 7%, and half will be less. Maybe 40% will be more than 8%, 20% more than 9%, and 5% more than 10%, and you have the same on the downside. So, if you get lucky and it's 1980, the next 20 years you earn 18%. You're in that far-right tail. If you're unlucky and it's 2000, the next 10 years you have negative returns and you underperform T-bills by 4% a year; you're in that left tail.

You have to think about it as you are subject to any one of these wide dispersions of returns, which is why we run what are called Monte Carlo Simulations that you put in assumptions about expected returns [and I'll come back to that in a second], and then the Monte Carlo Simulation spits out 3,000 scenarios and allows you to determine what's the right asset allocation that gives you the best chance of not running out of money -- even when those left-tail risks show up.

Let's come back quickly to how we forecast. The best estimate of expected bond returns is current yields, so today, let's use a five-year Treasury as a reasonable proxy. That's today about 2.5%, well below the historical average. The best estimates we have [and they're not great ones, but they're the best we have] of future stock returns is to take the earnings yield, or the inverse of the P/E.

As good as any is to take the Shiller CAPE 10, or the cyclically adjusted P/E ratio. Your listeners can go online and look that up. Today, that's about 28. If we were to invert that, obviously at 25, you invert, and you'd get 4%, so it's going to be a bit less. Let's just round it to 4% for our purposes, add in expected inflation of 2%-2.25%, you should be putting in a number maybe in the area of 6.5%, or something like that for U.S. stock returns.

So, investors have a problem, and in the introduction of my book, I talk about the Four Horsemen of the Retirement Apocalypse. Expected equity returns are now a lot lower than historically. Expected bond returns are a lot lower. Historically, a 60/40 portfolio has gotten about 8% over the last 35 years, and today it might be expected to get about 5%.

Combine that with longer living -- a much longer lifespan -- so we have to make the money last longer. An increasing risk of needing long-term care can chew up large amounts of money. And then even a fifth horseman is if we don't do something about Social Security's underfunding. In 2032, it's estimated Social Security will only be able to pay out 75%. So, you have to take that into account, as well, in figuring out assets.

A good rule of thumb, based upon those estimates I just walked through, is you should try to have 30 times the amount of spending you think you will need after you consider your Social Security and other pensions. So, if you needed $30,000 a year after you considered Social Security, then you should multiply that by 30, and that means you need $900,000, and that should be your goal. That's based on running thousands of Monte Carlos. So the old 4% rule, which was a multiple of 25, no longer holds because expected returns are now lower. You're expected to live longer, and you have, here, the risk of long-term care, as well.

Brokamp: Let's wrap up with a final question. You're a few years beyond the average retirement age in America, yet you're still working. What does retirement look like for Larry Swedroe? Do you think you'll ever retire?

Swedroe: Well, I consult with lots of high-net-worth people selling businesses. They want to retire, and they talk about going to the golf course. As I mentioned earlier, you want to make sure you don't retire from life.

The day I feel I'm going to work will be the day I retire. I love what I do. I get to help people. I enjoy reading, doing the research, and writing. I'm 67, now. I've committed to my firm I'll hang around at least until 72 full time, and after that, we'll see how health and family life goes. I would imagine even at that point, I'd probably still want to continue writing. Maybe working part-time at that point for a few more years.

Brokamp: Well, as one of your fans, I'm glad to hear that I can expect to read some stuff from you for many years to come. Again, your new book is called Your Complete Guide to a Successful and Secure Retirement written by Kevin Grogan and our guest, Larry Swedroe. Larry, thanks for joining us!

Swedroe: My pleasure, Bob!

--

Southwick: The Consumer Electronics Show, aka CES, kicked off last week. It's a massive trade show in Vegas where companies show off their latest innovations in consumer tech. Some of it is amazing. Some of it is weird. CNN described it best as, "like wandering through 2.7 million square feet of a SkyMall catalog." So, how much does living in the future cost? We'll see if you two can guess. Rick, are you ready, too, because I'm going to tell you about some of the hottest items on display at CES, and you're going to guess how much they cost.

Brokamp: Hm, boy!

Southwick: We're going to do closest without over. Are we ready?

Rick Engdahl: Ready.

Southwick: First up is Somnox, a pillow that mimics human breathing so you cuddle with it at night and sleep better. It looks like a big, upholstered lima bean.

Brokamp: Holy, cow!

Southwick: How much would you pay for that? And Rick, you're not allowed to say just $1 for everything.

Engdahl: I would pay $200, but not to put it on my bed. I would put it on somebody else's without telling them and just see how long it takes for them to notice that there's somebody breathing...

Brokamp: There's a big, breathing lima bean. I would say $299.

Southwick: Well, it's $549.

Brokamp: What? Geez, Louise!

Southwick: People love it. The Somnox can also play meditations, lullabies, audio books, or white noise if a heartbeat and breathing isn't for you. On the website, there's this photo. Most people hug it. I like to hug a blanket when I sleep, so I can understand wanting to hug something, but on the website, there's this photo of a woman cradling it like it's a baby and looking at it lovingly. I can get the idea of wanting to hold something, but cradling it -- maybe not so much. It made Tom's Guide Best of List for robots, so not messing around.

Engdahl: Come on! That's not a robot!

Brokamp: If you want to sleep with a robot, this is a great choice.

Southwick: This is the robot to sleep with.

Engdahl: That is not a robot. As a kid I had a pillow...

Brokamp: I slept with a robot. I know what that's like.

Engdahl: I had a pillow with a little cord coming out. I could plug it into my Walkman and I did. But that's not a robot. It just has a speaker in it.

Southwick: I mean, come on! I remember I had a stuffed animal that had a little heart in it, and when you would hug it, its heart would go ba-bum, ba-bum, ba-bum.

Brokamp: I remember those.

Engdahl: That's pretty freaky, too.

Southwick: I loved that little bear. The Rocking Bed, yes? It's a whole bed that rocks you to sleep. The investor came up with the idea when he slept like a rock on a cruise. How much would you pay for a king-sized Rocking Bed?

Brokamp: Ooh, geez!

Southwick: You grown men?

Brokamp: I'm going to say $3,000.

Engdahl: I would not pay $5,000.

Southwick: It is $3,450. Now, that is just for the bed. You still have to supply the mattress and the frame. From what I can tell in the videos, it shifts horizontally less than a foot.

Brokamp: It could be good, I guess. I don't know. I do like falling asleep in cars.

Engdahl: You can get seasick in the comfort of your own home.

Southwick: The TV everyone flipped out about is LG's rollable TV, because apparently the trend is moving toward hiding your TV, whether pretending it's a picture on the wall or, in LG's case, the TV rolls up like a piece of paper into a box.

Brokamp: Well, do you want to guess first? Or do you want me to guess first?

Engdahl: I'm going to guess $3,000.

Brokamp: I'm going to go with Rick's $5,000.

Southwick: The cost is actually TBD, but experts are suggesting it's going to be upwards of $8,000.

Engdahl: I'm not winning this game.

Southwick: That's OK. The Bread Bot. It's a bread-bending Rube Goldberg machine that mixes and bakes the loaf right there before your eyes, and this is super big, but it starts from dough, kneads it, proves it, and then boom! You open the door and pull out your loaf.

Brokamp: I'll say $500.

Southwick: Oh, this is something a supermarket would buy, by the way. Commercial grade.

Engdahl: This is like the taffy machine in the candy store.

Brokamp: So $500 is too low.

Southwick: Yes! It makes 10 loaves per hour.

Brokamp: I'm going to go with $5,000 again.

Engdahl: I'll go $8,000 this time.

Southwick: Oh, you guys. It's $100,000 with a five-year lease.

Brokamp: What?

Engdahl: I win!

Southwick: Here's one for Rick. How about a smartwatch for musicians? The Soundbrenner Core is a smartwatch with a light and vibrating metronome, decibel meter, and a magnetic contact tuner, which, for our listeners who don't know, you place it right on the string and then it tells whether it's tuned or not based on the vibrations. How much?

Engdahl: I've got to think that that's going to be a couple of hundred dollars, but everything it does the Apple Watch already does. Why would you spend money on this? I've seen it before. It seems to me a crazy idea because...

Southwick: You actually have seen this tuner before?

Engdahl: Yes. It doesn't strike me as a very unique item.

Brokamp: What did you say? $200? I'm going to say $500.

Southwick: It's $229.

Brokamp: Oh! The musician wins!

Southwick: The musician wins. It's described by CNET as something Tony Stark would have designed if he played guitar.

Engdahl: And didn't know about the Apple Watch.

Southwick: There you go. That's what I've got. As you can see, it's pretty expensive to live in the future...

Brokamp: I better start saving.

Southwick: ...but we're all rocking to sleep with our lima beans, and it's all going to be wonderful.

Engdahl: I need more items. I was making a comeback.

Southwick: You were! Sorry!

Brokamp: Too late! Fourth quarter, buddy!

Southwick: All right. So, that's the show! It's edited metronomically. I don't think that's a word, but it was Bro's suggestion, so I'm going with it.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Alison Southwick owns shares of Amazon. Rick Engdahl owns shares of Amazon, Apple, and The New York Times. Robert Brokamp, CFP, has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends The New York Times. The Motley Fool has a disclosure policy.